Financial firms have relied on a highly flawed business model for years. The time has come to fix it.
Until the recent tempest, Wall Street firms looked like just about the world's best businesses. Year after year, they posted sumptuous returns on equity, ever-rising share prices, and if you believed their claims, a new breed of CEOs who'd mastered the art and science of risk management. True, it was hard to decipher exactly how they made all that money. But make it they did.
The standards that rule most businesses - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it - didn't apply to Wall Street. So what if investors didn't understand all those arcane instruments and sophisticated hedging strategies? Wall Street was the black box on the Hudson that worked its own brand of magic.
Today, the magic is fading fast. It's time to step back and analyze how financial firms actually operate.
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